The growth of employment in the manufacturing sector has been an important issue in development economics for a long time. Employment growth is, of course, limited by output growth in this sector, but the elasticity of employment with respect to output has varied widely in different regions and economies. This paper focuses attention the idea that a major determinant of employment elasticity is the way the fruits of output growth are divided between employment growth and wage growth. The nature of the division in any economy depends on labor market institutions, and in particular the way the interests of the insiders' work out relative to the interest of the ‘outsiders'. But before we are able to determine the quantitative dimension of the trade-off, we have to allow for two other factors which affect the size of the cake available to labor in real terms. These are: the elasticity of the wage bill with respect to output -which determines the trend in the share of labor; and secondly, the price effect, depending partly on the rate of inflation and partly on the movements of producer prices relative to consumer prices. A simple decomposition procedure has been outlined in the paper which allows us to quantify the relative importance of these factors, and hence give a clearer idea of the labor market outcome leaning to one or other of the two interests, employment growth and real wage growth. The empirical analysis for different regions of the world is carried out on time series data for the manufacturing sector collected by UNIDO from the national surveys of member countries for the decades of the seventies and the eighties.

It was found that, after allowing for the value of the of the wage bill elasticity and the price effect, East Asia shared its growth almost equally between real wage and employment increase. Study of the sub-regions of Asia revealed significant difference between S.E. Asia and China on the one hand, and South Asia on the other, particularly in the eighties. The latter had moved away in this period from the others to a labor market outcome which favored real wage growth much more than employment growth. In this respect South Asia approached the experience of EEC and Japan in both periods, and of the United States in the second. At the other extreme we have the experience of SSA which emphasized employment retention at the cost of real wage decline.

This paper develops a theoretical macro-economic model that links social infrastructure investment, taxation, and wages to income determination and job creation. The framework incorporates productivity effects, a fiscal budget constraint, and the public good nature of social infrastructure investment and wages, identifying a multiple equilibrium problem with the possibility of a low social infrastructure investment trap. Three major results follow from the analysis.

First, fiscal austerity (characterised by reduced social infrastructure investment, lower taxes, and a low fiscal deficit) may reduce long run national income and economic capacity if the economy is in a low social infrastructure investment trap. The conventional trade-off between equity and growth disappears, and increases in social infrastructure investment and a relaxed budget constraint may improve both national income and distribution.

Second, wages play an important role in characterising the low social infrastructure investment trap and providing the government with policy alternatives. A low wage trap reinforces the scarce social infrastructure investment equilibrium. In an economy with massive unemployment, wages can provide important externalities, particularly through remittances and social inclusion effects. Firms may have insufficient incentives to raise wages to the socially optimal level, and this reluctance is reinforced by low levels of labour productivity associated with the scarcity of social capital.

Third, the low social infrastructure investment trap is reinforced by technology characterised by rapidly diminishing returns to labour. The more inelastic is the substitutability of labour for capital, the more likely will labour productivity enhancements lead to job destruction rather than job creation. South Africa's unemployment problem exhibits many of the characteristics associated with the low social infrastructure investment trap. Policies that may address this problem include increased taxes and borrowing to finance expanded social infrastructure investment, higher wages for the working poor, and restructuring industrial policy towards more labour-intensive production. Labour-intensive production need not entail low wage activities-industrial policy that raises labour productivity while increasing the elasticity of substitution between capital and labour can increase labour intensity while improving wages. Appropriate social infrastructure investment strategies can support this industrial policy.

It is widely agreed that technological learning and innovation are essential features of successful economic development. Yet achieving commercial success through technological innovation is notoriously difficult. Sophisticated entrepreneurial, managerial and organisational capabilities are at least as important as technical capabilities for achieving and sustaining this. Policy decisions around innovation expenditure should emphasise commercial not technical success. Expenditure should not only assist the development of new technologies, products and processes but also consider the development of managerial capabilities for penetrating large, difficult to enter overseas markets. This is a particular challenge in the manufacturing sector where innovation has traditionally been inwardly focused. Overcoming this is extremely important as this sector holds the key to broad-based job creation.

In this paper, we report on the preliminary results from an analysis of the macro impact of HIV/AIDS in South Africa. We have constructed an economywide simulation model that embodies the important structural features of the South African economy, into which we have added major impact channels of the HIV/AIDS epidemic. Using available demographic estimates for the impact of the epidemic (on labor supply, death rates, and HIV prevalence) along with assumptions about behavioral and policy responses (household and government spending on health, slower productivity growth), we use the model to generate and compare two scenarios: a hypothetical "no-AIDS" scenario in which the economy continues to perform as it has over the last several years, and an "AIDS" scenario in which the key AIDS-related factors affect economic performance. Focusing on the differential between the "no-AIDS" and "AIDS" scenarios, we find that the impact of the epidemic could be substantial. Over the 1997-2010 simulation period, GDP growth rates in the two scenarios diverge steadily, reaching a maximum differential of 2.6 percentage points. The result is a GDP level in 2010 that is 17 percent lower in the "AIDS" scenario; an alternative measure of "non-health, non-food absorption" is 22 percent lower by 2010. While some of this decline is due to the lower population associated with the "AIDS" scenario, per capita GDP does drop by around 8 percent. In fact, our simulations suggest that, despite the fact that AIDS impacts the high-unemployment unskilled labor category more than others, the net effect of higher AIDS-related mortality and slower growth is to leave the unemployment rate largely unchanged.

We also use the model to "decompose" the overall decline in growth performance into the contribution of the various channels. Given our current assumptions, the largest share (close to half) of the deterioration in growth is attributable to the shift in government current spending towards health expenses (which increases the budget deficit and reduces total investment), while an additional third stems from slower growth in total factor productivity (TFP). The decomposition illustrates the importance of considering the slow moving nature and hence long duration of the epidemic. If the epidemic imposes a drag on the rate of accumulation of knowledge (reduced TFP growth) or the rate of accumulation of capital (through a switch from savings to current expenditure), these effects become amplified over time. Over the course of a decade, the implications for macroeconomic performance are substantial.

Looking forward, our analysis suggests several avenues for further investigation. First, the parameters used in specifying the various AIDS effects are based on fairly limited empirical evidence, and it will be important where feasible to supplement these with additional data. For example, we have limited the impact of AIDS on household expenditure patterns to an assumed increase in health service spending, but there may well be other shifts that will occur and that could be incorporated, based on survey results. Second, there are important dynamic effects that are not yet included in the model: for example, lower private and government spending on education (because of higher AIDS spending) will slow down skills accumulation and change labor force growth rates. Third, consideration must be given to how to capture the impact of alternative "intervention" policies - for example, at present there is no feedback between possible government policies to slow the spread of AIDS, and the demographic (and subsequent economic) trajectory of the epidemic.

Finally, interactions between the epidemic and alternative growth and development strategies should be examined. We find that interactions with key economic features, such as the unemployment rate, do not necessarily conform to the results that one might expect from a casual analysis. And, key policy decisions, such as financing for AIDS related government expenditures, are shown to be very important. These results suggest that, while the human crisis appears to be practically unavoidable, appropriate economic policy measures have the potential to significantly palliate the negative economic effects of the epidemic. For the policy-making process, the slow moving nature of the epidemic needs to be borne firmly in mind. The AIDS crisis does not require the snap policy decisions of, for example, the Asia financial crisis. Instead, deliberate speed, careful planning, and competent execution by government and other actors could substantially ameliorate the economic aspects of the AIDS crisis.